c



 







Chris Bovaird has cited a practitioner¶s definition of venture capital as
follows:
«. the provision of risk-bearing capital, usually in the form of a participation
in equity, to companies with high growth potential. In addition, the venture capital
company provides some value added in the form of management advice and
contribution to overall strategy. The relatively high risks for the venture capitalists
are compensated by the possibility of high return, us ually through substantial
capital gains in the medium term[1].
Venture Capital is money granted by qualified who advance and administer
swiftly increasing companies that have the potential to enlarge as momentous
economic contributors. It is the progression of investing private equity in
companies to offer considerable potential to grow to a large extent and reward
investors in market. Venture capital tenders institutional investors and high -net-
worth individual¶s high returns and burly diversification benefits from very low
correlations with other asset classes.
Venture Capital firms characteristically supervise multiple funds formed over
intervals of several years. Funds are illiquid but as companies in the portfolio go
public or are sold, the investors comprehend their returns. A broad rule for the
breakdown of returns among VC company investments is 40% will be complete
losses, 30% will be "living dead," with the remaining 30% generating substantial
returns on the original investment. The big winners yield 10 or more times the
original investment. Venture capital has also been defined as investment in small
or medium sizes unlisted companies with the investors participating, in some
degree, in the management progress.[2]
The explanation of venture capital that commands the widest acceptability, is
that it is a separate asset class, often labeled as private equity, Private equity
investment sits at the furthest end of the risk-rewards spectrum from government
bonds and can broadly describe equity investment in private companies not quoted
on the stock market.[3]
ARD[4] (American Research and Development) Corporation, one of the few
venture capital firms created after the war. Incorporated on June 6, 1946, under
Massachusetts law, ARD was aimed at aiding µin the development of new or
existing businesses into companies of stature and importance,¶ as Doriot described
in the company¶s first annual report[5].
 









The Venture Capital takes part in a vital role in the developmen t and growth
of innovative entrepreneurships in India. Previously, venture capital funding was
done by the financial institutions. These financial institutions promoted corporate
bodies in the private sector with debt as a device of funding. In India, the call for
Venture Capital was acknowledged in the 7th five year plan and long term fiscal
policy of GOI[6]. Venture Capital financing actually originated in India, in 1988,
w ith the formation of Technology Development and Information Company of
India Ltd. (TDICI) - promoted by ICICI and UTI. The first private venture capital
fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted
by Bank of India, Asian Development Bank and the Commonwealth Development
Corporation viz. Credit Capital Venture Fund[7].

Regulatory framework of Venture Capital in India

Venture Capital in India governs by the SEBI[8] Act, 1992 and SEBI
(Venture Capital Fund) Regulations, 1996. According to which, any company or
trust proposing to carry on activity of a Ventur e Capital Fund[9] shall get a grant of
certificate from SEBI[10]. However, registration of Foreign Venture Capital
Investors (FVCI) is not obligatory under the FVCI regulations[11]. Venture Capital
funds and Foreign Venture Capital Investors are also cover ed by Securities
Contract (Regulation) Act, 1956, SEBI (Substantial Acquisition of Shares &
Takeover) Regulations, 1997, SEBI (Disclosure of Investor Protection) Guidelines,
2000.
   






There are three layers of structured or institutional venture capital funds i.e.
venture capital funds set up by high net worth individual investors, venture capital
subsidiaries of corporations and private venture capital firms/ funds. Venture funds
in India can be divided on the basis of the type of promoters.
1. Venture Capital Funds promoted by the Central government controlled
development financial institutions such as TDICI, by ICICI, Risk capital and
Technology Finance Corporation Limited (RCTFC) by the Industrial Finance
Corporation of India (IFCI) and Risk Capital Fund by IDBI.
2. It is promoted by the state government -controlled development finance
institutions such as Andhra Pradesh Venture Capital Limited (APVCL) by Andhra
Pradesh State Finance Corporation (APSFC) and Gujarat Ventur e Finance
Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC)
3. Also, promoted by Public Sector banks such as Canfina and SBI -Cap.
4. Venture Capital Funds promoted by the foreign banks or private sector
companies and financial institutions such as Indus Venture Fund and Grindlay's
India Development Fund[12].


 










For Venture Capital Funds it is required that Memorandum of Association or
Trust Deed must have main objective to carry on action of Venture Capital Fund
including prohibition by Memorandum of Association & Article of Association for
making an invitation to the public to subscribe to its securities. Further, it is
required that Director or Principal Officer or Employee or Trustee is not caught up
in any litigation connected with the securities market and has not at any time been
convicted of any offence involving moral turpitude or any economic offence. Also,
in case of, body corporate, it must have been set up under Central or State
legislations and applicant has not been refused certificate by SEBI[13].
A Venture Capital Funds may generate investment from any investor (Indian,
Foreign or Non-resident Indian) by means of issue of units and no Venture Capital
Fund shall admit any investment from any investor which is less than five Lakhs.
Employees or principal officer or directors or trustee of the VCF or the employees
of the fund manager or Asset Management Company (AMC) are only exempted. It
is also mandatory that VCF shall have firm commitment of at least five Crores
from the Investors before the start of functions by the VCF. Disclosure of
investment strategy to SEBI before registration, no investment in associated
companies and duration of the life cycle of the fun d is compulsorily being done. It
shall not invest more than twenty five percent of the funds in one Venture Capital
Undertaking. Also, minimum 66.67% of the investible funds shall be utilized in
unlisted equity shares or equity linked instruments of Ventur e Capital Undertaking.
It is also mandatory that not more than 33.33% of the investible funds may be
invested by way of following as stated below: -
1. Subscription to IPO[14] of a Venture Capital Undertaking (VCU)
2. Debt or debt instrument of a VCU in wh ich VCF has already made an
investment by way of equity
3. Preferential allotment of equity shares of a listed company subject to lock
in period of one year
4. The equity shares or equity linked instruments of a monetarily weak
company or a sick industrial company whose shares are listed.
5. SPV (special purpose vehicles) which are created by VCF for the purpose
of making possible investment.


 




A foreign venture capital investor proposing to carry on venture capital
activity in India may register with the Securities and Exchange Board of India
(³SEBI´), subject to fulfilling the eligibility criteria and other requirements
contained in the SEBI Foreign Venture Capital Investor Regulations. The SEBI
Foreign Venture Capital Investor Regulations prescribe the following investment
guidelines, which can impact overall financing plans of foreign venture capital
funds.
a) The foreign venture capital investor must disclose its investment strategy
and life cycle to SEBI, and it must achieve th e investment conditions by the end of
its life cycle.
b) At least 66.67 per cent of the investible funds must be invested in unlisted
equity shares or equity linked instruments.
c) Not more than 33.33 per cent of the investible funds may be invested by
way of:
· Subscription to initial public offer of a venture capital undertaking, whose
shares are proposed to be listed.
· Debt or debt instrument of a venture capital undertaking in which the foreign
venture capital investor has already made an investment, b y way of equity.
· Preferential allotment of equity shares of a listed company, subject to a lock -
in period of one year.
· The equity shares or equity linked instruments of a financially weak or a sick
industrial company (as explained in the SEBI FVCI Regulations) whose shares are
listed.
A foreign venture capital investor may invest its total corpus into one venture
capital fund[15].
 °










Indian Venture Capital Funds are allowed to tax payback under Section
10(23FB) of the Income Tax Act, 1961. Any income earned by an SEBI registered
Venture Capital Fund (established either in the form of a trust or a company) set up
to raise funds for investment in a Venture Capital Undertaking is exempt from
tax[16]. It will also be extensive to domestic VCFs and VCCs which draw overseas
venture capital investments provided these VCFs/VCCs be conventional to the
guidelines pertinent for domestic VCFs/VCCs. On the other hand, if the Venture
Capital Fund is prepared to forego the t ax exemptions available under Section
10(23F) of the Income Tax Act, it would be within its rights to invest in any
sector[17].
   


India legal system and industrial jurisprudence evolved venture capital
financing as a µsanjivni¶ to business ideas. Positioning of legal framework is to
facilitate more and more invitation to new and dynamic ideas. Further, tax burden
have also been reduced to invite youth participation in national progress. In the
near future, venture capital would be the prime finan cing opportunity to the
coming business fraternity.
--------------------------------------------------------------------------------
[1] Dr. Neil Cross, quoted in Venture Capital Finance, Chris Bovaird, Pitman,
London, 1990
[2] Asian Venture Capital Journal, Guide to Venture Capital in Asia, Hong
Kong, 1992-1993. Also, S. Ramesh, Arun Gupta, Venture Capital And the Indian
Financial Sector, p.no.48-49
[3] George Anson, µVenture Capital in Europe¶, European Venture Capital
Association Yearbook, London, 1992
[4] American Research and Development Corporation was a venture capital
and private equity firm founded in 1946 by Georges Doriot, the "father of venture
capitalism and is credited with the first major venture capital success story when its
1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be
valued at over $355 million after the company's initial public offering in 1968.
Also,
http://en.wikipedia.org/wiki/American_Research_and_Development_Corporation
(Accessed on 05-07-2010)
[5]
http://www.thehindubusinessline.com/2008/06/19/stories/2008061950360900.htm
(Accessed on 06-02-2009)
[6] Gazette of India Notifications are published by department of publication
and are printed by the Government of India Printing Presses regularly. This is an
authorized legal document of Government of India containing the mode of
operations under the law of the land. Also, http://egazette.nic.in (Accessed on 06 -
02-2009)
[7] http://www.indianmba.com/Faculty_Column/FC159/fc159.html
 [8] The Securities and Exchange Board of India was established on April 12,
1992 in accordance with the provisions of the Securities and Exchange Board of
India Act, 1992
[9] Venture capital is a type of private equity capital typically provided by
outside investors to new businesses.
[10] Section-12 (1B) of the SEBI Act. Also, makes it compulsory for every
domestic VCF to get certificate of registration from SEBI in conformity with the
regulations.
[11] http://india-financing.com/The law of Venture capital in India.pdf
(Accessed on 05-07-2010)
[12] http://www.indianmba.com/Faculty_Column/FC159/fc159.html
(Accessed on 05-07-2010)
[13]Rule-4, SEBI (Venture Capital Funds) Regulations 1996
[14] IPO stands for Initial Public Offering and describes the process where a
private entity offers its shares to the public for the first time.
[15] http://www.business-
asia.net/pdf_pages/Venture_Financing/08mar_apr_venture_financing.pdf(Accesse
d on 13-07-2010)
[16]
http://www.abanet.org/buslaw/committees/CL930000pub/newsletter/200603/singh
.pdf (Accessed on 05-07-2010)
[17] http://www.delhilaw.firm.in/articlenews/venturefund -guideline.htm (
Accessed on 09-07-2010)

2.

 









Over the years, many bright and talented scientists, engineers, and other
technologically-adept individuals have emigrated from India to the United States
with the hope of experiencing America¶s free social and economic structure. As a
result, they studied at the finest universities and were recruited to work at well-
renowned companies in order to achieve the American dream. Despite the
adversities associated with adjusting to a new country, most of them worked
extremely hard, succeeding in their chosen fi elds and greatly contributing to many
important causes. One particular field that many Indians have triumphantly thrived
in is information technology. In fact, many Indian -Americans were at the forefront
when the IT industry exploded in the 1990s. Since th en, many Indians have moved
on to become successful entrepreneurs, angel investors, and venture capitalists in
the United States.

Indian entrepreneurs in the Silicon Valley

In recent years, Indians have played a significant role in shaping America¶s
high-tech world. In a study that was conducted several years ago at the University
of California, Berkeley, it was estimated that in 2000, more than 30,000 Indian IT
professionals had lived and worked in Silicon Valley and were either founders or
top executives of almost 1000 companies in the area. Today, the statistics are much
higher. In fact, it is estimated that currently 40% of all information technology
companies in the Silicon Valley have been started by Indian entrepreneurs.

Well-known Indian entrepreneurs

One such important figure is Vinod Khosla, the co-founder Sun
Microsystems, Inc., a California-based company that specializes in computers and
information technology products and services. Khosla is known for partnering with
a major venture capita l firm (called Kleiner, Perkins, Caufield, & Byers) and
investing in dozens of other startups, both in the United States and India.

Other successful Indian entrepreneurs turned investors are Suhas Patil,

founder of Cirrus Logic, a Massachusetts-based semiconductor company, and
Gururaj Deshpande, the co-founder and chair of Sycamore Networks, Inc., another
Massachusetts-based enterprise that develops and markets networking tools
worldwide.

Success in the Silicon Valley leads to investments in India

In recent years, numerous American investors have viewed India as a land of
vast investment opportunities. This reality has encouraged many successful Indian
entrepreneurs and investors of Silicon Valley to invest in India -based companies.
Successful Indian business men such as Gururaj Deshpande (founder of Sycamore
Networks, Inc.), Vinod Dham (father of Intel's Pentium chip), Vani Kola (founder
of RightWorks software), and Vinod Khosla (Sun Microsystems, Inc.) are widely
known for investing their time and mo ney in numerous startups in their homeland.

Why invest in India?

There are many reasons why India is very appealing to international
investors. First, India is considered the second fastest growing economy in the
world. Investors primarily envision this success as an exciting frontier where they
can use the skills and contacts they have developed in America in order to network
in India. This opportunity further diversifies their knowledge and skills in creating
an expansive socio-economic impact. In fact, many investors who invest in Indian
companies bring more than money to India; they are both benefiting from and
fueling a new sense of possibility. Not only do these Indian angel investors and
venture capitalists provide locals with numerous jobs, but their financial
contributions also promote Indian startup growth, stimulating the economy in
many small communities as well as the overal l economy.

Examples of success
For many years, Gururaj Deshpande (Sycamore Networks, Inc) mentored and
invested money in helping first-time entrepreneur, Sanjay Nayak, build India's first
homegrown telecom-equipment company, Tejas Networks. Now six year s old,
Tejas Networks has grown dramatically and currently holds the No. 2 market share
in India. Similarly, former McKinsey & Co. managing director Rajat Gupta, who
left India more than 20 years ago, used a combination of his Indian savvy skills
and brilliant network abroad to help build the Indian School of Business and the
Public Health Foundation of India (PHFI). Six years after it opened its doors for
the first time, ISB is now the eighth largest business school in the world.

Future success
The growing Indian economy and the positive outcomes of many of these
financial contributions have eventually led to a spike in enormous investments in
India. In fact, Google billionaire Ram Shriram¶s Sherpalo Ventures is actively
seeking investment opportunities in India. Other well-known Indian-American
investors have already taken advantage of the opportunity to invest, including
Hotmail founder, Sabeer Bhatia, who has recently unveiled plans for a $2 billion
infrastructure project in Haryana, India. Bhatia expects that his project, in
conjunction with the Haryana government, will surpass the U.S.¶s Silicon Valley.
In addition, Yahoo! and Canaan Partners invested $8.65 million in
BharatMatrimony.com, one of India's largest matrimonial websites. This newly
funded venture will enable BharatMatrimony.com to expand its operations and
increase its paid consumer base. Furthermore, many venture capitalist firms and
angel investment groups started investing in more Indian -based companies.

Venture capitalists investing in India

For a very long time, Silicon Valley venture capitalists only invested locally.
However, throughout the years, they expanded their investments worldwide. Most
recently, Matrix Partners, a leading American venture capitalist firm, had
announced a $150 million India fund, where they will provide internet, mobile,
media, entertainment, leisure, and travel services to customers in Mumbai. Sequoia
Capital, a Silicon Valley-based VC firm, wanted to take advantage of investing in
startup companies and had acquired Westbridge Capital, an Indian firm, for $350
million. Several other major VCs who are also taking advantage of the growing
Indian market are Kleiner Perkins, NEA, Norwest, Battery, Sierra, and Canaan
Partners. It is no wonder that venture capita list investments in India have risen
dramatically within the past few years. From 2005 to 2007, VC investments in
India grew from $320 million to about $777 million, respectively.

Angel investors investing in India

While the venture capitalists have provided extremely large sums of money
for many Indian-based startups, many Indian entrepreneurs are still seeking much
smaller amounts for their early stage ventures. Alok Mittal, co-founder of
jobsahead.com and executive director of Canaan Partners¶ Indian office (a global
VC firm) found that angel capital for Indian-based investments were rare. He then
decided to establish the group Band of Angels India to address the need for smaller
amounts of capital for early-stage Indian investments. BoA consists of successful
entrepreneurs, business executives, and investors of diverse industries) who not
only provide small amounts of early-stage funding but also mentor in diverse areas
(strategy, finance, etc.) to the entrepreneurs of their invested companies. This ha s
led the way for many more angel investor groups committing to smaller amounts
of capital for early stage ventures in India. Even though there are more Indian
venture capitalist firms than there are angel investors, more and more angel groups
have strongly emerged in recent years, supporting the idea of investing in smaller
amounts. Some of the most prominent angel investment and venture capital groups
in India are:

Investment style
Most of the traditional financers in India provide debt financing (borro wed
money) for qualified entrepreneurs. However, many Indian-American angel
investors and venture capitalists use equity financing as a means for their
investments. Through equity financing, entrepreneurs do not have to worry about
monthly debt payments and share part ownership of their company in exchange for
capital. Equity financing is a sure way to help budding entrepreneurs in taking their
young startups forward. Entrepreneurs in India who intend to raise capital for their
companies should therefore network with such individuals and explore the
different possibilities of raising equity investment.

Conclusion
In recent years, there has been a surge in India-based investments by both
venture capitalists and angel investors. This rising trend is primari ly due to India¶s
growing economy, which has made it very appealing for Indian-American
investors to invest in their native land. Information technology, pharmaceuticals,
and apparel are some very popular industries of investment. While many Indian
venture capitalists of Silicon Valley have invested tens and hundreds of millions of
dollars to startups in India, angel investors have been more inclined to invest
smaller amounts in early stage ventures.

3.

VENTURE CAPITAL INVESTMENT IN THE INDIAN MARKET

V
V
  V  
    
While venture capital and private equity funding may be considered a new phenomenon in India, the
sector itself has seen its share of highs and lows. In the late nineties, India seemed to be the ¶flavor of the
day· for its IT brainpower, with venture capital being pumped into the country. The dot com downfall in
2001-2002 burst the bubble, and venture capitalists were more tentative in investing in Indian
undertakings. However, after two years of consolidation in 2003 and 2004, the Indian economy followed
an upward spiral in 2005. As investors watched the surge in the Indian stock markets in 2005, the
persons monitoring developments on this front most closely seemed to be the venture capitalists. The
booming markets merely confirmed their belief that India was indeed one of the most attractive
destinations for their funds to yield high returns. While the major markets of United States, Europe and
Israel have witnessed a growth in venture capital funding, China and India are clearly the emerging
1
markets where both venture capitalists and private equity players are expected to park their funds.
Various studies and analyses published over the past 18-24 months have projected India to be the fastest
growing economy over the next few decades. A recent study conducted by Deutsche Bank Research
projects the annual growth of GDP in India to be around 5.5% until 2020, while countries like the U.S.,
Canada and France are projected to have growths of only 3.1%, 2.4% and 2.3%, respectively, for the
2
same period .
The typical venture capitalists ¶venturing· into India today consist of successful global venture capitalists,
high net-worth individuals and private investors, all of whom are looking to cash in on India·s vibrant
markets. 2005 witnessed over 68 investments in India with a total funding of US$ 1.8 billion. Major
investors have included reputed venture capitalists such as Newbridge Capital, ChrysCapital, Warburg
3 4
Pincus, Temasek and General Atlantic, among others . As could be expected, the IT-ITES sector
continues to lead other sectors in terms of investment. The other sectors that have attracted significant
investment include manufacturing, healthcare and life sciences. As of December 2005, the total venture
capital investment portfolio in India was estimated to be at US$ 4.3 billion (see below). The total number
of venture capital firms in India has increased from 2003 and 2004, and these firms now employ over
290 professionals (see below).
° V
  


  
 No. of Deals Value (US $ Million)


 Sector
IT-ITES 33 422.90
1
´Robust Fund Raising and Liquidity Prices in 2005, Along With Global Investing, Forecast Renewed Vigor For Venture Capital in
2006µ, by Ernst & Young.
2
As per the survey, the other growth centers are expected to be Malaysia at 5.4%, China at 5.2% and Tha iland at 4.5%. See Strategic
Review 2006 published by the National Association of Software and Service Companies (Nasscom).
3
Each of these venture capital investors have invested between US$ 50 -100 million in various sectors. For a detailed account of th e
key deals in 2005, please refer to Strategic Review 2006, published by Nasscom. http://www.nasscom.org
4
Information Technology and Information Technology enabled business services.
5
Strategic Review 2006 published by the National Association of Softw are and Service Companies (Nasscom).
http://www.nasscom.org
Indian Venture Capital 23 331.45
Market Page # 1 V

V    
!!"Manufacturing
Healthcare and Life 13 201.24
sciences
Banking and Financial 6 146.70
Services
Textiles 12 146.50


  # 
$ v
v v v  v  v 
 
 

"

  %
v
Number of 81 77 78 81 86 89
VC Firms
Estimated 278 267 270 278 289 292
VC
Professionals
Investment 850 1135 1050 865 1363 665
during the
year (US$
Million)
Investment 1587 2343 3188 3120 4739 4304
portfolio as
of December
31, 2006